3 Economics Global slowdown concerns mount as stocks and gold correct Philadelphia Fed Outlook and Conference Board Leading indicators add to growing gloom As payroll tax hikes continue to kick in, firms deplete existing inventories and postpone hiring plans. After the deterioration of the outlook for the New York area, the greater Philadelphia area followed a similar pattern. Not surprisingly the Conference Board Leading indicator fell 0.1%, from a plus 0.5% in the earlier month. Gold and stocks indicate growing fear? Growth concerns probably overdone A reversal to recession fears is bad for stocks, and through the channels of deflation and emerging markets, also for gold. Yet, contained spreads and a resilient euro against the US dollar are still reminiscent of a moderately risk-on environment. If one recognizes that post-lehman US trend growth is lower than pre-lehman US trend growth, then a cooling of activity was inevitable. Indeed, job creation in excess of an average of 200'000 units per month, observed from over the last two quarters, is consistent with a 3% annual growth rate. Since the financial crisis, the United States' economy has not been able to "escape" from a more modest 2% annual growth rate. Yet, while also the housing markets is showing a bit more signs of fatigue, it is too early to call an end of the US real estate pickup (today's true engine of the US business cycle). Indeed, housing data is necessarily volatile and, while new building permit requests were down, housing construction starts were up. Page 3 9

4 Economics European Central Bank will soon be forced to act Inflation remains no concern It is true that in March headline inflation remained stable and that even core inflation had a more than expected uptick (from 1.3% YoY to 1.5% YoY, against 1.4% YoY). Yet, at 1.7% headline inflation remains well below the 2% target. More importantly, with labor costs under continuing pressure and oil prices receding, there are little upward pressures on the horizon. Weakness is extending beyond countries with financial fragmentation problems A conventional interest rate level is of little help in countries such as Spain and Italy that suffer from the Euro-zone's financial fragmentation. Financial fragmentation essentially means that the monetary transmission mechanism does not work such that Spanish and Italian companies have to pay high interest rates, in spite of the ECB's low reference rate. Yet, Mr. Draghi has pointed out that weakness is now also extending to countries that do not have these problems. The concern is that relatively large economies, such as The Netherlands and France, also get trapped in continuing recession. Thus, while Frankfurt is also studying "nonconventional" measures to break the specific consequences of financial fragmentation, it looks likely to reduce its reference rate too. Fed QE exit might be delayed Since the sequester might create additional uncertainty through November, we expect the Fed to stick to QE through most of the year. This explains while the rebound of the US dollar might be postponed for some while. We still believe it to occur sooner rather than later, as the ECB will, in one way or another, engage expanding its monetary basis, while the Fed will be the first major central bank to exit QE. Page 4 9

5 FX Markets No rates hike in sight for Canada The tightening cycle is fading along Canada's growth outlook. As widely expected, the Bank of Canada (BoC) left its target unchanged for the overnight rate at 1%. The BoC kept a tightening bias by saying that "some modest withdrawal will likely be required after a period of time". But given the lower growth forecast, coupled with CPI inflation lower than 1% (the official target is 2%), it is very unlikely to see any rate hike in the foreseeable future. Indeed, tightening would be intended to prevent further household credit growth. However, the overall strong Canadian dollar, which is hurting exports, and the weakening business cycle outlook would rather call for rate cuts. The weak growth outlook favours a stronger USD/CAD. This gradual shift away from a tightening cycle to a prolonged period of low interest rates (with potential rate cuts along the way) is also shifting our bias towards the USD/CAD. Indeed, we do not see anymore many factors calling for a stronger Canadian dollar versus the US dollar, except an extreme reading in net short CAD positions. However, these indicators are always secondary to price action and, currently, the USD/CAD is not showing any bearish reversal pattern. Moreover, the IMF, which tends to be quite successful in forecasting Canada's growth, warned that a worsening European debt crisis, a fading U.S. recovery or a decline in the global demand for commodities are all factors that could aggravate the economic outlook. The recent economic developments in the U.S. and in China do not bode well for Canada. Looking at the chart, medium to long-term upside potential for USD/CAD are given by the resistances at (June 2012 peak) and (November 2011 peak). Page 5 9

6 FX Markets Monetary stimulus from Bank of England is getting nearer Recent economic data suggest a less rosy phase of global cooling. On Wednesday, the United Kingdom had its share of weak economic releases by publishing a rise in unemployment and a modest increase in the general regular pay (while inflation remains at 2.8% YoY). It is true that an increase in the assets purchase programme of the Bank of England would likely support higher inflation, but given the fiscal austerity and the squeeze on consumers coming from high inflation and low wages, the burden of supporting growth lies in the BoE's hands. However, we still believe that any big change is unlikely to occur before Mr Carney's arrival in July. Indeed, barring a dismal Q1 GDP figure (to be released on 25 April), the BoE should only consider an extension of the Funding for Lending scheme during its next meeting on 9 May. Meanwhile, the decline in oil prices and in other commodities should tame inflation in the short-term. From a technical point of view, the break to the downside of the large multi-months horizontal range between and coupled with the recent short-term rebound suggest that it could already be the time to build short positions in the GBP/USD. Even though a longer rebound could not ruled out, as the main BoE monetary stimulus should occur in August, we continue to believe that the medium-term trend favour a move towards the support at (May 2010 trough). Page 6 9

7 FX Markets Gold has lost some of its shine Gold suffered its sharpest fall on 15 April since the 1980s, losing more than 9% at the closing bell and breaking the long-term key support at 1523 that was holding since end of Basically, gold demand can be divided in four categories: jewellery, investment, technology and central bank net purchases. The demand coming from technology and jewellery tends to remain fairly constant, with the difference that technology's percentage of total demand is small while the one from jewellery is large. On the other hand, demand from central banks and investment is more volatile, with the latter having increased regularly since 2011, along with the rise of gold, so as to reach roughly the same size of jewellery demand. Therefore, the behaviour of these last two categories is key to understand what lies ahead for gold. Central banks have been net buyers since However, the decision of the Cyprus National Bank to sell its gold as part of refinancing measures could be followed by other central banks. Overall, we do not expect central bank net purchase to have a positive impact on gold. Investors, on the other hand, have invested in gold throughout the last ten years as an inflationary hedge, a financial crisis hedge and because of its stellar performance since the start of However, recent economic data indicate that no inflation is in sight as the global recovery is still struggling. Thus gold is becoming relatively less interesting as a safehaven asset, as the recent Cyprus crisis has shown. The resulting decline in price is expected to have left scars among investors, so a pickup in investment demand is unlikely in the next months, which favours further decline towards at least 1290 USD. However, long-term investors and jewellery demand are likely to put a floor in gold's decline and lead to a new range for wide sideways moves. Page 7 9

8 FX Markets Potential delayed US QE's exit favours EUR/USD The International Monetary Market (IMM) non-commercial positioning is used to visualise the flows of funds from one currency to another. It is usually viewed as a contrarian indicator when it reaches an extreme in positioning. Euro short positions have been reduced, which has led to some Euro strength. The recent weak economic data coming from the US, suggesting that the Fed could delay its QE exit, coupled with a significant short Euro positioning could lead to further short-term strength for the Euro. The British pound saw further increase in short positions. It is approaching the extreme levels seen in September 2008 (-48.37%) and March 2010 (-54.82%). Even though this increases the risks of GBP rebounds, we continue to believe that the weak growth, the fiscal tightening, the change of the BoE's remit and the arrival of Mr Carney will lead to a more aggressive BoE, which ultimately should weaken the British pound. The short positions in the Japanese yen have not increased despite the recent sharp JPY depreciation. It suggests that there are not only speculative flows pushing the yen lower but also some structural flows. We continue to believe that BoJ's bold measures will continue to put pressure on the yen, leading to further depreciation. The positioning in Australian dollar is still extremely long. Even though it suggests that risks are more biased to the downside, we would more focus on the price evolution or, in other words, a break of the horizontal range between roughly and to give the direction of the next medium-term trend. Page 8 9

9 DISCLAIMER No information published constitutes a solicitation or offer, or recommendation, or advice, to buy or sell any investment instrument, to effect any transactions, or to conclude any legal act of any kind whatsoever. The information published and opinions expressed are provided by MIG Bank for personal use and for informational purposes only and are subject to change without notice. MIG Bank makes no representations (either expressed or implied) that the information and opinions expressed are accurate, complete or up to date. In particular, nothing contained constitutes financial, legal, tax or other advice, nor should any investment or any other decisions be made solely based on the content. You should obtain advice from a qualified expert before making any investment decision. All opinion is based upon sources that MIG Bank believes to be reliable but they have no guarantees that this is the case. Therefore, whilst every effort is made to ensure that the content is accurate and complete, MIG Bank makes no such claim. Limitation of liability MIG Bank disclaims, without limitation, all liability for any loss or damage of any kind, including any direct, indirect or consequential damages. Material Interests MIG Bank and/or its board of directors, executive management and employees may have or have had interests or positions on, relevant securities. Copyright All material produced is copyright to MIG Bank and may not be copied, ed, faxed or distributed without the express permission of MIG Bank. Page 9 9

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